Quadrophobia: Strategic Rounding of EPS Data by Joseph Grundfest, Nadya Malenko

SSRN-Quadrophobia: Strategic Rounding of EPS Data by Joseph Grundfest, Nadya Malenko

Stanford Business School researchers demonstrate that "managed earnings" are easily detectable by looking at whether corporate EPS tends to dis-include the number 4. For companies using accounting methods to heighten reported earnings, Quadrophobia will occur as companies that are manipulating earnings will find a way to make 0.4 EPS, 0.5 or higher -- as when an EPS fraction is at 0.4, the number will be rounded down to 0.0.

In the study, top chart is the actuals, while the second is the EPS fraction. If there were no bias (null hypothesis here), the second chart actuals would fall in the confidence interval for the null hypothesis (no bias).